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New York’s Profligate New Mayor Risks Fiscal Ruin to London’s Gain

SEVERAL cities have declared bankruptcy in the US in the last
few years, with Detroit the most prominent example. Based on this
week’s mayoral election results, it’s not inconceivable
that New York City may join the queue. The new mayor-elect Bill de
Blasio has a tax-and-spend agenda reminiscent of the profligacy
that led Greece to fiscal ruin.

Pessimism is warranted because there are common themes in the
local governments that have run out of money. One is government
employee unions that capture the political process and insist on
excessive compensation packages, including gold-plated retirement
benefits. This pushes up the expenditure side of the budget.

Meanwhile, local politicians raise taxes to facilitate their
spending sprees. On paper, it appears they can achieve fiscal
balance. But one thing politicians conveniently overlook is that
taxpayers are not sheep awaiting slaughter; when taxes climb,
particularly on highly-mobile workers and entrepreneurs, some
taxpayers “vote with their feet” and move to
jurisdictions with less oppressive systems.

The new mayor-elect Bill
de Blasio has a tax-and-spend agenda reminiscent of the profligacy
that led Greece to fiscal ruin.

It doesn’t take mass emigration to destabilise a local
government’s finances, particularly when a city is very
dependent on a limited number of high-income taxpayers. That is why
de Blasio’s fiscal agenda is so risky. He wants to raise the
New York City income tax (which comes on top of the 39.6 per cent
federal income tax and the 8.8 per cent state income tax) from
3.876 per cent to 4.41 percent for taxpayers with an annual income
over $500,000.

For those of us toiling away on middle-class incomes, a tax hike
of about 0.5 percentage points may seem insignificant. But the
average additional burden on New York City’s high flyers
would be almost $200,000 annually. That’s not small change,
and with upper-income taxpayers paying 43 per cent of the
City’s income tax, it matters if even a handful of these
people decide they’re tired of being fleeced. And there are
plenty of zero-income tax states in the US that would roll out the
welcome mat to attract fiscal refugees, like Texas, Florida,
Wyoming, Nevada, and Tennessee.

For all intents and purposes, de Blasio wants to conduct the
same experiment as President Hollande in France. But tax
competition and taxpayer mobility are undermining Hollande’s
class warfare, and the same thing will likely happen if de Blasio
imposes his statist agenda.

But there is some good news: New York City does not have full
control of its fiscal affairs. Any changes in the local income tax
or local sales tax have to be approved by the state. Democratic
governor Andrew Cuomo reportedly has national ambitions, and has
expressed scepticism about de Blasio’s planned tax hike.
Further, Republicans control the state senate and presumably will
not be overly sympathetic to any fiscal plan that pillages Wall
Street.

So folks in places that compete with New York City — such
as London, Tokyo, and Hong Kong — shouldn’t put
champagne on ice quite yet. Mayor-elect de Blasio wants to help
your cities, but it’s uncertain at this stage whether he will
succeed.